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ESSENTIAL GUIDE
TO PROJECT
CONTRACTS
Part 3
Siddharth Sahasrabudhe
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01 Role of Responsibility
in Contract
Most of the problems in contracting arise because of
improper definition of scope or assigning
responsibilities.
The owner may not like to define everything clearly and
technically in order to keep some flexibility regards to
scope of work.
The contractor may not like clear definition since he
may not be able to make extra claims and earn high
reimbursement for any additional work.
But it is in interest of both parties to keep ambiguities
to bare minimum.
02 Role of Responsibility
in Contract
Responsibility in contract involves taking care of
following major issues:
What to include in scope of work of contractor and
what to exclude?
How to define scope of work so that contractor
knows their scope of work precisely and there is no
overlapping, un-allocated or ambiguous work areas.
Deciding performance parameters for completion
for which contractors must held accountable
03 Role of Risk in Contract
Both contractor and owner bears a risk while entering
into a contract.
Owners risk is due to the following factors:
Will the contractor be able to carry out the work as
per specification
Can the work be completed within quoted time and
cost
Will the plant perform at the required level
Will contractor stay on job till its completion
Will contractor co-operate with owner and rectify
the defects later
Does contractor understand fully his scope of work
04 Role of Risk in Contract
Contractors risk is due to the following factors:
Termination of work before its completion
Adherence to payment schedules as agreed in the
contract
Interruptions in progress and change of scope
Compensation for extra claims
Does owner understand fully his scope of work
Technical know-how of the owner
05 Types of Contracts
Broadly contracts can be divided into two groups. These
are:
Turn-key contacts
Non-turn key contracts
Lump-sum contract
Cost plus contract
Labour contract
EPC contract
BOOT contract
PPP
06 Turnkey Contract
Turnkey contracts as the name suggests are
contracts where the client, on completion, turns a key
in the door and everything is working to full
operating standards.
Turnkey contractors have responsibility for design,
construction, equipment procurement and
commissioning phases of a project.
In this contract, client prepares performance
specification and a scope document for contractor.
Due to increased responsibility, cost of tendering is
also increased and hence smaller number of bidders
are invited.
Once the contract has been placed the client role is
severely limited and clients ability to make any
changes other than a formal contract variation is
almost none.
07 Lump-sum Contract
In this contract, the contractor agrees to execute the
work completely in all respects, within the stipulated
time, in accordance with the drawings, designs and
detailed specifications and for an agreed price.
The payment is made to the contractor on reciept of
completion certificate issued by client.
Since this type of contract is used for major
package/project, time of completion of work is crucial
factor.
Time of completion is clearly given in the contract and
penalty for slow progress is also included as one of the
conditions of the contract.
08 Cost Plus Percentage
Contract
In Cost Plus Percentage of Cost (CPPC) contract, the
contractor is reimbursed for all allowable costs incurred
during the performance of the contract, plus an
additional percentage of those costs as profit.
This contract type is often used in situations where the
scope of work is not clearly defined, or where the costs
are difficult to estimate upfront.
In this method the contractor uses his own materials,
labour and executes the work according to the drawing
and specification. The contractor keeps proper
accounts of the material and labour charges.
The owner keeps close control during execution to
ensure the quality of material and specification. After
completion of work the contractor is paid some
percentage above the actual cost of execution.
09 Labour Contract
This contract is entered into only for the labour
portion of the project.
This type of contract is chosen when the project
promoters do not want to compromise on the quality
of material to be used.
The contract typically includes details such as job title,
duties, work hours, salary or wage, benefits, and
duration of employment.
10
EPC (Engineering,
Procurement and
Construction)
EPC contracts are step behind turnkey contracts
where the contractor is responsible for complete
engineering, procurement and construction of entire
project complex.
The contractor is also responsible for process design
and basic engineering. If process design involves
third party IP license, it is obtained from process
licensers through EPC contractor or directly by the
owner.
The contractor delivers a complete facility or system
to the client, ready for operation, and often includes
precommissioning activities.
This type of contract is prevalent in sectors like oil and
gas, power generation, and infrastructure
development.
11 BOOT Projects
BOOT stands for Build-Own-Operate-Transfer is is a
type of public-private partnership (PPP) where a
private entity is granted the right to finance, build,
own, and operate a facility or infrastructure project for
a specified period.
After this period, ownership is transferred to the
public sector.
BOOT contracts are commonly used for large-scale
infrastructure projects such as power plants,
transportation systems, and water treatment
facilities.
This model allows governments to reduce upfront
cost, leverage private sector expertise and capital
while eventually gaining ownership of the asset.
12 Public Private
Partnership (PPP)
PPP contracts have both public and private sector
funding.
Many projects which have higher social cost benefit
analysis than their financial analysis, can not be
funded by private finance on commercial terms.
For e.g. a project involves starting a hospital for
Economically underprivileged groups in society has
higher social cost benefit but may not be
commecrcially viable for private funding.
In this case, the project viability is ensured by the
public sector reducing project risk at an acceptable
level.
13 Next
In Part 4 of the Essential Guide series we will look at
some more contract terms and conditions
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